Jeff Bezos Goes Grocery Shopping

Image

Jeff Bezos, Amazon founder and chief, is making a foray into the grocery business.CreditCreditMike Segar /Reuters

By Robert Cyran

June 16, 2017

Amazon.com just bought its way to the top of the food chain. The e-commerce giant is going whole hog for United States grocery stores with the $13.7 billion acquisition of the upscale chain Whole Foods Market.

Amazon’s comfort with low margins and knowledge of logistics make it so fearsome a rival that investors in the sector ran for cover.

A relentless focus on the long-run opportunity of selling practically everything to everyone has been the hallmark of Jeff Bezos, the Amazon founder and chief executive. For most of its history, Amazon, a nearly half-trillion-dollar company, has been run at break-even with its prodigious cash flow plowed back into price reductions, expansion into new areas and investment to ensure faster delivery.

So groceries are a natural target. Americans spend about $800 billion a year on Cheerios, kale and ground beef, according to Cowen research. It is also a business whose profitability is notoriously low. Whole Foods, for example, generated a net margin of 3.2 percent last year. That is astronomical by Amazon’s standards. Its own margin was 1.7 percent.

The deal nevertheless creates some seismic shifts. For one thing, it is Amazon’s biggest acquisition ever by a considerable sum. While Mr. Bezos has been tinkering with rolling out bookstores, Whole Foods vastly increases Amazon’s bricks-and-mortar presence with 460 stores. And the deal expands Amazon’s work force by about a quarter.

In exchange for this strategic deviation, Amazon gets access to a great many wealthy customers and information about their food-buying habits. Mr. Bezos could easily extend the benefits of his company’s popular Prime membership into goods and services at grocery stores, thus giving them additional reason to buy even more from Amazon.

It also has been trying to shrink shipping costs. Amazon lost $7 billion in subsidizing deliveries last year. Having customers pick up their purchases in Whole Foods stores might help.

There is a strong sense from investors that Amazon is upending the entire business. Its own market value increased by $15 billion on the news. More significantly, it caused about $30 billion to disappear from Costco, Walmart Stores, Kroger, SuperValu and other grocery vendors.

Fears of Amazon’s domination went global, as British supermarket chains were hit, too. And it is possible that delivery start-ups like Instacart may be affected. Grocery stores aren’t a winner-take-all proposition, but Amazon may be about to eat a lot of lunches.

Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.